1.
Organizing the Corporation A promissory note for P25,300 was drawn by the defendant in favor of
1. CAGAYAN FISHING DEVELOPMENT CO., INC.,
vs.TEODORO SANDIKO G.R. No. 43350 December 23,
1937 Corporation, Incorporation, Promoters of
Corporation.
OCTOBER 14, 2017
FACTS:
Manuel Tabora is the registered owner of four parcels of land and he
wanted to build a Fishery. He loaned from PNB P8,000 and to
guarantee the payment of the loan, he mortgaged the said parcels of
land. Three subsequent mortgages were executed in favor of the same
bank and to Severina Buzon, whom Tabora is indebted to.
Tabora sold the four parcels of land to the plaintiff company, said to be
under process of incorporation, in consideration of one peso (P1)
subject to the mortgages in favor of PNB and Severina Buzon and, to
the condition that the certificate of title to said lands shall not be
transferred to the name of the plaintiff company until the latter has
fully and completely paid Tabora’s indebtedness to PNB.
The articles of incorporation were filed and the company sold the
parcels of land to Sandiko on the reciprocal obligation that Sandiko
will shoulder the three mortgages. A deed of sale executed before a
notary public by the terms of which the plaintiff sold, ceded and
transferred to the defendant all its rights, titles and interest in and to
the four parcels of land.
He executed a promissory note that he shall be 25,300 after a year with
interest and on the promissory notes, the parcels were mortgage as
security.
the plaintiff, payable after one year from the date thereof. Further, a
deed of mortgage executed before a notary public in accordance with
which the four parcels of land were given as security for the payment
of the said promissory note. All these three instruments were dated
February 15, 1932.
Sandiko failed to pay, thus the action for payment. The lower court
held that deed of sale was invalid.
The corporation filed a motion for reconsideration.
ISSUE:
1.Whether Cagayan Fishing Dev’t. has juridical capacity to enter into
the contract.
2. Can promoters of a corporation act as agents of a corporation?
RULING:
1.The transfer made by Tabora to the Cagayan Fishing Development
Co., Inc., plaintiff herein, was effected on May 31, 1930 and the actual
incorporation of said company was effected later on October 22, 1930.
In other words, the transfer was made almost five months before the
incorporation of the company.
A duly organized corporation has the power to purchase and hold such
real property as the purposes for which such corporation was formed
may permit and for this purpose may enter into such contracts as may
be necessary. But before a corporation may be said to be lawfully
organized, many things have to be done. Among other things, the law
requires the filing of articles of incorporation. Although there is a
presumption that all the requirements of law have been complied with,
in the case before us it can not be denied that the plaintiff was not yet
incorporated when it entered into the contract of sale.
The contract itself referred to the plaintiff as “una sociedad en vias de
incorporacion.” It was not even a de facto corporation at the time. Not
being in legal existence then, it did not possess juridical capacity to
enter into the contract.
“Corporations are creatures of the law, and can only come into
existence in the manner prescribed by law. As has already been stated,
general laws authorizing the formation of corporations are general
offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statute, or
certain acts are required to be done, they are terms of the offer, and
must be complied with substantially before legal corporate existence
can be acquired.”
“That a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or
transact any business, would seem to be self evident. . . . A
corporation, until organized, has no being, franchises or faculties. Nor
do those engaged in bringing it into being have any power to bind it by
contract, unless so authorized by the charter. Until organized as
authorized by the charter there is not a corporation, nor does it possess
franchises or faculties for it or others to exercise, until it acquires a
complete existence.”
2.The contract here was entered into not only between Manuel Tabora
and a non-existent corporation but between Manuel Tabora as owner
of four parcels of land on the one hand and the same Manuel Tabora,
his wife and others, as mere promoters of a corporation on the other
hand. For reasons that are self-evident, these promoters could not have
acted as agents for a projected corporation since that which had no
legal existence could have no agent. A corporation, until organized,
has no life and therefore no faculties. It is, as it were, a child in ventre
sa mere. This is not saying that under no circumstances may the acts of
promoters of a corporation be ratified by the corporation if and when
subsequently organized. There are, of course, exceptions , but under
the peculiar facts and circumstances of the present case we decline to
extend the doctrine of ratification which would result in the
commission of injustice or fraud to the candid and unwary.
The transfer by Manuel Tabora to the Cagayan Fishing Development
Company, Inc. was null because at the time it was effected the
corporation was non-existent, we deem it unnecessary to discuss this
point.
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Chapter 5: Promoters’ Contracts Prior to Incorporation
25 SCRA 285 - RIZAL LIGHT & ICE CO., INC. vs. PSC and Morong Elec. Co. (1968)
ZALDIVAR, J.:
PSC granted Morong Electric’s application for a CPCN. Rizal Light, a prior operator
contested this decision stating that such grant was invalid considering SEC issued Morong
Electrics certificate of incorporation months after the decision. SC held that while a
franchise cannot take effect until the grantee corporation is organized, the franchise may,
nevertheless, be applied for before the company is fully organized; a grant of a franchise is
valid although the corporation is not created until afterwards.
DOCTRINE
McQuillin: “The fact that a company is not completely incorporated at the time the grant is
made to it by a municipality to use the streets does not, in most jurisdictions, affect the
validity of the grant. But such grant cannot take effect until the corporation is organized…”
Fletcher: “While a franchise cannot take effect until the grantee corporation is
organized, the franchise may, nevertheless, be applied for before the company is
fully organized. A grant of a street franchise is valid although the corporation is not
created until afterwards.”
Thompson (explains reason for these rules^): “…an ordinance granting a privilege to a
corporation is not void because the beneficiary of the ordinance is not fully organized at
the time of the introduction of the ordinance. It is enough that organization is complete
prior to the passage and acceptance of the ordinance. The reason is that a privilege of
this character is a mere license to the corporation until it accepts the grant and
complies with its terms and conditions.”
xxx
[IMPT] The ruling that a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or transact any
business is NOT ABSOLUTE. Under American jurisprudence, a contract made by the
promoters of a corporation on its behalf may be adopted, accepted or ratified by the
corporation when organized.
FACTS
1. Morong Electric applied for a CPCN with the PSC to provide for electric service in
Morong, Rizal.
2. In May 1962, Morong Electric was granted a franchise. PSC found that “Morong
Electric is a corporation duly organized and existing under the laws of the Philippines,
the stockholders of which are Filipino citizens, that it is financially capable of operating
an electric light, heat and power service, and that at the time the decision was
rendered there was absence of electric service in Morong, Rizal”
3. It was only on October 17 of the same year that the SEC issued Morong Electric’s
certificate of incorporation.
4. Rizal Light, a prior operator, contends that Morong should not have been granted the
CPCN because:
o it did not have a corporate personality at the time it was granted a franchise and
when it applied for said certificate
o it is not financially capable of undertaking an electric service
o petitioner was rendering efficient service before its electric plant was burned, and
therefore, being a prior operator its investment should be protected and no new
party should be granted a franchise and certificate of public convenience and
necessity to operate an electric service in the same locality.
ISSUE with HOLDING
WON the franchise granted to Morong Electric is valid despite the fact that such was
granted before Morong Electric’s certificate of incorporation was issued by the SEC –
VALID
 Petitioner: until a corporation has come into being, in this jurisdiction, by the issuance
of a certificate of incorporation by the SEC, it cannot enter into any contract as a
corporation. The franchise was granted to Morong Electric when it was not yet in esse
is null and void
 SC: Petitioner's contention that Morong Electric did not yet have a legal personality
when a municipal franchise was granted to it is correct. The juridical personality and
legal existence of Morong Electric began only when its certificate of incorporation was
issued by the SEC.
o Before that date, or pending the issuance of said certificate of incorporation, the
incorporators cannot be considered as de facto corporation, but the fact that
Morong Electric had no corporate existence on the day the franchise was
granted in its name does not render the franchise invalid, because later
Morong Electric obtained its certificate of incorporation and then accepted the
franchise in accordance with tshe terms and conditions thereof. This view is
sustained by eminent American authorities (see doctrine)
 Thus, the incorporation of Morong Electric on October 17, 1962 and its acceptance of
the franchise as shown by its action in prosecuting the application filed with the
Commission for the approval of said franchise 1) perfected a contract between the
respondent municipality and Morong Electric and 2) cured the deficiency pointed out
by the petitioner in the application of Morong EIectric.
 The conclusion regarding the validity of the franchise granted to Morong Electric is not
incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc.
vs. Teodoro Sandiko wherein Court held that a corporation should have a full and
complete organization and existence as an entity before it can enter into any kind of a
contract or transact any business.
o this Court did not say in that case that the rule is absolute or that under no
circumstances may the acts of promoters of a corporation be ratified or
accepted by the corporation if and when subsequently organized
o there are exceptions such as the fact that American courts generally hold that a
contract made by the promoters of a corporation on its behalf may be adopted,
accepted or ratified by the corporation when organized
DISPOSITIVE PORTION
PSC decision affirmed.
DIGESTER: MTR
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028 FERMIN CARAM, JR. and ROSE DE CARAM v. CA and ALBERTO V.
ARELLANO
151 SCRA 372 (June 30, 1987)
CRUZ, J.
Topic: Corporate Entity, Disregarding the corporate entity
Facts:
1. The services of Barretto was requested to initiate the incorporation
of Filipinas Orient Airways (FOA).
2. Barretto was referred to as the “moving spirit” of said corporation
because it was through his effort that it was created. Before FOA’s
creation though, Barretto contracted with a third party, Alberto
Arellano, for the latter to prepare a project study for the feasibility
of creating a corporation like FOA.
3. The project study was then presented to the would-be
incorporators and investors.
4. On the basis of said project study, Fermin Caram, Jr. and Rosa
Caram agreed to be incorporators of FOA. Later however, Arellano
filed a collection suit against FOA, Barretto, and the Carams.
5. Arellano claims that he was not paid for his work on the project
study.
6. Lower Court: Orders the Carams to jointly and severally pay
Arellano P50,000.00 for the preparation of the project study and his
technical services that led to the organization of the defendant
corporation, plus P10,000.00 attorney’s fees
- It was upon the request of Barretto and Garcia that Arellano
handled the preparation of the project study which project
 study was presented to Caram so the latter was convinced to
invest in the proposed airlines.
- The project study was revised for purposes of presentation to
financiers and the banks. It was on the basis of this study that
defendant corporation was actually organized and rendered
operational.
- Garcia and Caram, and Barretto became members of the Board
and/or officers of defendant corporation
- All the other defendants who were involved in the preparatory
stages of the incorporation must be liable
7. The petitioners claim that this order has no support in fact and law
because they had no contract whatsoever with the private
respondent regarding the above-mentioned services.
8. Their position is that as mere subsequent investors in the
corporation that was later created, they should not be held
solidarily liable with FOA, a separate juridical entity, and with
Barretto and Garcia (their co-defendants in the lower court) who
were the ones who requested the said services from Arellano.
Issue:
Whether or not petitioners themselves are also personally liable for such
expenses and, if so, to what extent? NO. The petitioners did not contract
the services of Arellano. It was only the results of such services that Barretto
and Garcia presented to them and which persuaded them to invest in the
proposed airline.
Ruling:
GRANTED. Petitioners are not liable.
Held:
The petitioners were not really involved in the initial steps that finally led to
the incorporation of FAO, which were being directed by Barretto as the
main promoter. It was he who was putting all the pieces together. The
airline was eventually organized on the basis of the project study with the
petitioners as major stockholders and, together with Barretto and Garcia, as
principal officers. The petitioners were merely among the financiers whose
interest was to be invited and who were in fact persuaded, on the strength
of the project study, to invest in the proposed airline.
There was no showing that FAO was a fictitious corporation and did not
have a separate juridical personality, to justify making the petitioners, as
principal stockholders thereof, responsible for its obligations. As a bona
fide corporation, FAO should alone be liable for its corporate acts as duly
authorized by its officers and directors.
The petition is rather hazy and seems to be flawed by an ambiguous
ambivalence. It is unnecessary to examine at this time the rules on solidary
obligations, which the parties-needlessly, as it turns out have belabored
unto death.
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b. Subscription Contracts
Trillana vs Quezon College, G. R. No. L-5003, June 27, 1953
Facts: Damasa Crisostomo subscribed 200 shares of capital stock with a par
value of P100 each through a letter sent to the Board of Trustees of the
Quezon College, enclosed with the letter are a sum of money as her initial
payment and her assurance of full payment after she harvested fish. On
October 26, 1948, Damasa Crisostomo passed away. As no payment appears
to have been made on the subscription mentioned in the foregoing letter,
the Quezon College, Inc. presented a claim before the CFI of Bulacan in her
testate proceeding, for the collection of the sum of P20,000, representing
the value of the subscription to the capital stock of the Quezon College, Inc.
which was then opposed by the administrator of the estate.
Issue: Whether or not the condition entered into by both parties are valid.
Held: No, Under article 1115 of the old Civil Code which provides as follows:
"If the fulfillment of the condition should depend upon the exclusive will of
the debtor, the conditional obligation shall be void.”
XXXXXXXXXXXXXXXXXXXXXXX
1. Purchase Agreement nothing to refund. Moreover, a later resolution on August 22 already
cancelled the resolution of August 1.
Bayla v Silang Traffic Co.

GR. No. L-48195-96, May 01, 1942

The trial court absolved the corporation and forfeited the
Ozaeta, J.:
petitioners’ shares and payments to the corporation. The Court of
Appeals affirmed the decision but allowed the petitioners 30 days to
pay the arrears in their subscription. From this decision, petitioner and
FACTS: Sofronio Bayla, along with the other petitioners in this case, respondent appealed to the Supreme Court.
individually purchased shares of stock of Silang Traffic Co. Each of
the petitioners had different specified terms and conditions of
payment. Similar among them is that 5% is to be paid upon the
ISSUE: Were the petitioners’ shares of stock automatically forfeited in
execution of the contract, and the remainder in installments of 5%
favor of Silang Traffic Corporation upon their failure to pay the
quarterly due within the first month of the quarter. Deferred payments
installment due on or before July 31?
will incur 6% interest per annum until paid, and failure to pay any of
said installments when they are due will revert the shares back to the
seller and the payments already made are to be forfeited in favor of the
company, without resort to court proceedings. RULING: No. The Court held that for their stocks to be forfeited to the
corporation, a demand must first be given by the corporation for the
payments due on or before July 31. It did not automatically revert to
the corporation. Under Article 1100 of the Civil Code, persons obliged
Petitioners have already paid sums of money for the shares of
to deliver or do something are not in default until the moment the
stock they wanted to purchase. However, they failed to pay the
creditor demands of them judicially or extra-judicially the fulfillment
installment which fell due on or before July 31, 1937. On August 1,
of their obligation. The current situation does not fall under the any of
1937, the board of directors of Silang Traffic Co. released a resolution
the exceptions. The contract itself did not expressly provide that the
stating a rescission was to be made for the good of the corporation and
failure of the purchaser to pay any installment would give rise to
in order to terminate the then pending civil case involving the validity
forfeiture and cancellation without the necessity of any demand from
of the sale of the shares in question. Those who would agree can
the seller. In fact, it states that there would be a 6% interest on deferred
refund the installments already paid. The petitioners agreed to the
payments which shows that there was no intention of automatic
rescission and demanded for the refund of the amounts they had paid.
forfeiture and cancellation of contract. As such, the Court reversed the
Silang Traffic Co. refused to refund the petitioners’ money stating that
decision of the Court of Appeals and ordered Silang Traffic Co. to
because of their failure to pay the installment due on or before July 31,
refund the petitioners’ money.
the clause stating that their shares would revert back to the corporation
and their payments forfeited had taken effect, and that there was XXXXXXXXXXXXXXX
2. Pre-Incorporation Subscription
3. Release from subscription obligation